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Tesla Accused Of Operating Illegal Showrooms In 4 States

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Given today's high gas prices, many car shoppers are turning their attention to hybrids and other fuel-efficient vehicles. Electric cars like those built by Tesla [NASDQ:TSLA] could be attractive to better-off buyers, but Tesla is facing some legal problems that may slow the selling process.

Automotive News reports that dealer networks and government regulators across the U.S. have begun to question Tesla's sales techniques. And in several cases, they've threatened legal action to stop the start-up.

A new paradigm for auto sales

According to the National Automobile Dealers Association, 48 states have franchise laws that forbid or restrict the ability of automakers to sell vehicles directly to the public. That's why dealerships tend to be independently owned and operated. Tesla showrooms, on the other hand, are owned by Tesla itself. 

However, Tesla says that the majority of its showrooms -- designed by George Blankenship, the man behind Apple's outrageously successful chain of retail shops -- don't actually conduct sales; they simply share information about Tesla vehicles. When it's time to seal the deal, Tesla staff point prospective shoppers to the automaker's website, where they can customize and reserve their vehicle

Other dealers aren't buying it. They insist that even though Tesla's showroom staff don't technically sell vehicles on site, they do everything else that a traditional dealership would do. In short, they argue that by facilitating the sales process, Tesla showrooms are essentially conducting sales.

To date, questions about the legality of Tesla showrooms have arisen in four states: Illinois, Massachusetts, New York, and Oregon. Because franchise laws vary from state to state, each case is a bit different: some complaints have been brought by dealer associations, and in Illinois, the challenge was lodged by the Secretary of State. Tesla says that it is doing everything it can to comply with each state's regulations.

Tesla currently maintains 17 showrooms in 10 states and the District of Columbia, but it's set to open another six this fall. As Tesla expands operations and its reputation grows, we'd expect to see many, many more challenges to its business model down the line.

Will Tesla eventually shift to a conventional model of independently owned dealerships? Or will it bring about a change in the way that state laws are written -- laws generally written decades ago, when there was far less competition in the marketplace and states wanted to put big automakers on more equal footing with smaller ones?

And more importantly, will Tesla's unusual sales paradigm -- which has recently been copied, in part, by Audi -- change the way that automakers interact with customers?

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Comments (13)
  1. Nobody has legal standing to bring a suit against Tesla until Tesla offers a franchise to someone in one state and denies it to someone else in another.
    As long as the states get their sales tax revenue from the sale of each car delivered in their state and all maintenance performed within the state, they should be happy.

  2. Ask most people and the problem with typical auto sales is the dealers themselves. When a local dealer creates a problem (and they often do), it’s not just that dealer that bears the brunt of an unhappy customer but the entire brand itself, along with thousands of employees that work for Ford, Chrysler, Honda, Toyota, etc. All because of the monopoly on local markets that dealers enjoy. NADA and most independent dealers are the problem, not Tesla who is trying to do something new.

  3. Thank You!
    Sounds like the are heading u a Sales Prevention Committee!!

  4. Great news! They must be scared of the Tesla sales future!
    I own some stock! Get em Tesla!

  5. I doubt if we'll see Tesla doing any franchising. Like it or not, Tesla will be selling cars direct to customers, just as other specialty car, boat & aircraft manufacturers already do. If necessary, Tesla will take NADA to court and sue for restriction of interstate commerce, like Ben & Jerrys did with Pillsbury back in the day.

  6. What a load of poop! It's the product that's at issue (I'm not a big fan of Tesla... yet) and these other guys are scared that they won't be able to compete. Just a smokescreen.

  7. Sorry, Jim. You need to do your homework! Tesla has out performed on every front. The other auto makers are the ones afraid they can't compete! They are still tied to the coattails of the gas industry!!

  8. Typical stupid protectionist laws - preventing a better business model from taking root...

  9. Typical big government regulations that need to stay out of business's way to grow. This is the problem with our country and it needs to change to allow growth and global competition.

  10. I think it's hilarious that the other auto makers are suddenly realizing that electric vehicles are going to be competition!! Sounds like they are trying any way they can to shut down the competition. I have long studied the Tesla vehicles, and am amazed at the abilities of this car. Wake up people! It's time to get rid of that gas monkey on your back!! Go to your local Nissan dealer, for one, to see the reality of EV's. Would I buy one?? In a New York minute if I had the money!

  11. 'Illegal' That header, to be fair' ... should have read like this ... Illegal(?)

  12. It isn't manufacturers that are complaining, but auto dealership franchises who have a large overhead and pay a lot of money to comply with state franchise laws and the requirements of the manufacturers. They are not worried about Tesla, per se, but rather a precedent that will allow mainstream manufacturers to bypass them after they have made such large investments.

  13. Does this mean the car shows are illegal, or are those cars being shown by dealers?

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